Will SaaS Transform the Retail Industry?

 In Articles
We are in the midst of a retail paradigm shift. Where transactional metrics have commonly been the underlying assumption of success, Customer Lifetime Value (LTV) will be reasserted as consumers continue to signal they yearn for a more personal, fluid, and authentic relationship with brands. Nordstrom has focused on this metric for years – their return policy is proof of that. Now, the time has come for all businesses to follow suit.Eventually, this shift will settle into a framework commonly referred to as ‘Digital Commerce 3.0’ – A retail ecosystem that will be defined by collaboration. Salespeople will be empowered to build stronger customer relationships and forge loyalty – especially with high-value clients – by leveraging their data signals from omnichannel technology.

Reinventing the retail customer experience requires a different business model to adequately support new goals and activities.

The Traditional Retail Model

The Traditional Retail Model is entirely focused on the “product” or “transaction.” The end goal for businesses in a Traditional Model is driven by product, where growth is measured by the activities leading up to the transaction. The pressure has been to consistently acquire new customers.

A Model with an Incorrect Definition of Success

This transactional approach needs to be challenged. While the model appropriately measured success in a simpler economy where consumption was product-focused, it falls short in today’s experiential and digitally driven ecosystem.

The reality of ecommerce is that marketplaces are overcrowded and saturated, driving prices down, elevating expensive free shipping as a competitive threat and making product differentiation nearly impossible. The unwavering 2.44% average ecommerce conversion rate is proof of that.

We must define success differently and metrics must adapt to industry changes. Overall progress and health of Traditional Retail Models – and the relationship with customers – are traditionally measured against metrics that are product centric such as conversion rates, year-over-year same store sales, sales per square foot, and return on ad spend (ROAS).

But because we’re using product-specific metrics to define success, businesses have largely focused on point-to-point interactions – from awareness to transaction – to dictate strategy. All company efforts are made to generate a sale (such as advertisements, promotions, price-cuts, free shipping) and end once a sale is complete. Customer transactions, then, are often measured as a series of distinct revenue streams – mobile, online, in-store – contributing to the overall business success.

As I reflect on 4-Tell’s own business model, it’s those who have adopted similar practices that govern a SaaS Subscription Model that are able to successfully deliver exceptional customer experiences throughout the entire shopper journey.

Customers are not Transactions – They’re People

The definition of success must challenge the status quo of product-centric and transaction-driven benchmarks. Success must be defined by the unique, consistent, and collaborative experiences we provide for our customers over time.

When businesses solely focus on separate and distinct transactions, they are not creating opportunities to connect with shoppers beyond the purchase, nor are they able to offer a comprehensive, personalized and fluid shopping experience to profit on the long-term value of a customer. They are just beginning to capture user-specific knowledge, and despite billions in product-centric, omnichannel investments, few can consistently provide cross-channel support through the shopper journey. The customer and sales experience is fragmented, inconsistent, and too often, unaware of the customers themselves.

Evading customer loyalty doesn’t just equate to a less enjoyable experience for the shopper, either – it has financial consequences, too. It costs 5 times as much to attract a new customer than to keep an existing one. And the price to acquire new customers – ROAS – cuts even deeper when we consider the Facebook and Google duopoly placing premiums on advertising as their data and audience reach is continually enriched. Unfortunately, this is only going to get worse as the duo extends their dominance of digital advertising this year to control 60% of the growing market, according to an eMarketer report.

When you compare the Customer Acquisition Costs (CAC – the entire cost of sales & marketing over a given period / # of customers acquired) to the monetization of a customer – or LTV (LTV – gross margin from that customer over the lifetime of your relationship) businesses fail every time CAC exceeds LTV. With escalating acquisition costs and neglected customers, it will time and time again.

LTV: The Heart of Subscription Based Models

This is the problem retailers are left to solve – how do we extend and grow customer LTV to balance increasingly expensive acquisition costs? Today’s most successful businesses realize every transaction requires a follow-up to continue the conversation and forge deeper loyalty. Most brands have leveraged marketing and sales technology – retargeting ad platforms, automated email campaigns, mobile and geocentric offers – to build customer loyalty.

The more these measures are taken to extend the collaboration beyond a point-to-point transaction, the more we liken to Software as a Service (SaaS) Subscription Model – the model under which 4-Tell and other marketing and sales technology companies work.

Measuring Customer-Centric Success

Unlike transaction-centric models, Subscription models measure the recurring revenue over an extended period – LTV – to balance acquisition costs. For example, if a SaaS company spent $6,000 to acquire a customer, it would require 13 months of $500 recurring payments to recover acquisition costs and finally begin to become profitable.

For businesses operating under these models, the formula for growth is entirely focused on monetizing long-term relationships – where happy customers are the key to success. Thus, measuring churn (lost customers), monthly retention rates (MRR) (which are morphing quickly to Annual Retention Rates, or ARR), and LTV are all extremely important to assess the health of a SaaS business.

Take the HubSpot example below. You can see from the second row in this table how they dramatically improved their unit economics (LTV:CAC ratio) over the five quarters shown. The big driver for this was lowering the MRR Churn rate from 3.5% to 1.5% through product improvements and exceptional customer service. This drove up the lifetime value of the customer considerably.

SaaS subscription models are great at measuring the fluid relationship between the customer and the business. And by measuring the health of the business in this way, we have been forced to be better at managing a direct, complex, responsive, multi-channel relationship with our customers. We’ve been forced to listen to our customers, understand their business needs, and consistently provide them value through collaborative connections and the knowledge we’ve gained over time.

Now, we understand that acquiring new customers will always be critical for growth. And we’re not suggesting we abandon or stop measuring marketing and advertising altogether. Rather, we’re suggesting that more should be invested in extending customer LTV to balance acquisition costs and allow for more profitability. And the only way to achieve that is by adjusting your metrics to reflect a new definition of success: boosting the relationship you have with your existing customers. By putting customer satisfaction at the heart of your digital commerce, you’ll create the opportunity to continue the digital collaboration beyond products, past transactions and, as a result, build your bottom line

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